Top Glove sees stronger quarter despite challenging operating environment
KUCHING: Top Glove Corporation Bhd’s ( Top Glove) quarter- onquarter (q- o- q) performance improved despite the challenging backdrop in the sector.
The research arm of TA Securities Holdings Bhd ( TA Securities) noted that while Top Glove’s first half of the financial year 2017 (1HFY17) core earnings of RM150.4 million came below consensus’ expectations, its quarter- on- quarter (q- o- q) growth net earnings improved by 17.1 per cent to RM81.1 million.
It added that this was due to the strengthening of the US dollar against the ringgit by six per cent and upward revisions to average selling prices (ASPs) by three per cent in US dollar terms to pass through the increase in raw material prices, which are natural rubber latex (an increase of 33.4 per cent q- o-q) and nitrile latex (an increase of 10.2 per cent q- o- q.
“Suggesting improving supply and demand dynamics, management guided for further upward revisions to ASPs made during the quarter that will only be reflected in the third quarter of FY17 ( 3QFY17) due to the time lag factor.
“Coupled with improvements made across the manufacturing process, earnings before interest, tax, depreciation and amortisation ( EBITDA) margins improved by 0.9 percentage-points to 14.6 per cent. Meanwhile, sales volume declined by one per cent q- o- q owing to the quarter’s shorter working period,” TA Securities said.
On the group’s financial standing, the research team pointed out that while Top Glove’s financial performance remained healthy, its net cash position declined by RM220.7 million q- o- q to RM39 million.
“This was attributed to capital expenditure for expansion of RM160.3 million, dividend payments of RM106.5 million and the increase in working capital requirements caused by the increase in raw material prices,” it explained.
Looking ahead, TA Securities opined that concerns lie with the direction of raw material prices, particularly natural latex which positively, of late, have retreated from its 2017 year to date ( YTD) peak of RM8.18 per kilogramme (kg) at end-January 2017 to RM7.27 per kg at its last close, representing a 11.1 per cent decline.
“Barring growth in sales volume, management expects sustained sequential performance at the very least if prices do not deviate far from current levels,” it added.
On the expansion front, the research team noted that Top Glove had alluded that it would continue to progressively expand its glove manufacturing capacity to capitalise on the sustained growth in global demand for gloves of six to eight per cent per annum.
“We note however of some variations to imminent nitrile glove focused expansion with delays to F30 (4.4 billion gloves per annum) and F31 (2.8 billion gloves per annum) due to hiccups related to the supply of natural gas.
“Additionally, the group introduced a new plant, F32 (4.8 billion gloves per annum), which is also intended to house nitrile gloves,” it added.
With increased requirements for expansion plans, Top Glove had guided that capex for FY17 and FY18 would respectively be around RM250 million to RM300 million and RM200 million to RM250 million, higher than its previous guidance of RM200 million across both years.